Indian Shares Rally After Rate Cut

4/17/2012 7:23 AM ET

Indian shares rallied on Tuesday, with rate-sensitive realty stocks leading the gainers, after the Reserve Bank of India cut interest rates for the first time in three years. The central bank slashed its repo rate by an unexpected sharp 50 basis points to ease the liquidity crunch in the money markets and support faltering economic growth. Economists were expecting a quarter point reduction.

A firm trend in European markets on reports of a successful Spanish debt auction, where the nation managed to sell its full target of bonds on offer despite higher borrowing costs also helped buoy investor sentiment late in the afternoon.

The benchmark 30-share Sensex finished the session up 207 points or 1.21 percent at 17,358, with 27 of its components advancing. Maruti Suzuki, Reliance Industries and Mahindra & Mahindra bucked the upward trend to end down between 0.03 percent and 0.47 percent.

The Reserve Bank of India cut the repo rate and reverse repo rate by 50 basis points with immediate effect, but left the CRR untouched at 4.75 percent. The central bank said that the reduction in the repo rate is based on an assessment of growth having slowed below its post-crisis trend rate which, in turn, is contributing to a moderation in core inflation.

However, with upside risks to inflation persisting, these considerations inherently limit the space for further reduction in policy rates, the central bank said. It also warned that India's current account deficit, which widened to 4.3 percent of GDP in the December quarter, is "unsustainable" and will be difficult to finance given projections of lower capital flows to emerging markets in 2012.

The rate cut decision will encourage investments and contribute to strengthening of business sentiments, finance minister Pranab Mukherjee told reporters in New Delhi. He also said the government will take some additional steps to boost growth.